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Roth IRA for Children: Asset Retention Strategy

Roth IRA for Children: Asset Retention Strategy

Do you want to make an investment in the future value of your practice? Asset leakage due to client death is a serious long-term danger to many advisory practices since the inheritors of client assets often do not stay with the financial advisor. By working with clients today to open a Roth IRA for their minor children, you lay the groundwork to establish relationships with the future heirs of your clients’ wealth during their most formative years.

The Benefits of a Roth IRA for a Child

Earned income is, of course, a necessary requirement for a child to fund a Roth IRA, which can come from a number of sources: babysitting, mowing lawns, dog walking and even paying a child for performing household chores. When a parent pays a child for household chores, it must be at a reasonable rate.

The reason a Roth IRA is preferred over a traditional IRA for a child is that the income tax deduction is of little value to someone making so little money. Instead, the real value lies in the build-up of future tax-free withdrawals.

Naturally, a child earning money may not be enthusiastic about funding his or her retirement, instead preferring to spend it on a video game subscription or a date night. Recognizing this, parents are permitted to gift a Roth IRA contribution up to the eligible contribution amount.

For example, a child may contribute up to 100% of earned income, not to exceed $6,000. A child who earns $4,000 can spend the entire amount, while the parents gift him or her $4,000, which can be used to fund that year’s Roth IRA contribution.

Alternatively, parents may want to encourage a savings discipline and choose to incentivize their child by offering a matching contribution (e.g., $1 match for every $1 the child directs to the Roth IRA).

While the goal may be to create tax-deferred growth over multiple decades and set a solid foundation for tax-free income in retirement, it helps knowing that Roth IRA funds are accessible to meet important expenses that most children will face in their lives long before they retire.

Even if a Roth IRA owner is under age 59 ½—and has had the Roth for more than five years—earnings can be withdrawn without being subject to taxes for a number of reasons, among them, to help pay for a first-time home purchase (up to $10,000), qualified education expenses, costs related to birth or adoption, and disability.

A Roth is also a great platform for beginning an investment education that a child will profit from for the rest of his or her life.

Establishing a Roth IRA for a child puts an advisor in front of that child for years to come, right up until he or she inherits his or her parents’ wealth.

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